Promissory Fraud, “Puffery” and Earn-Outs: Delaware Court of Chancery Provides More Guidance in Shareholder Representative Services LLC v. Sphera Solutions, Inc.

As we have observed in our April 2026 Advisory regarding Camaisa v. Pharmaceutical Research Associates, Inc. and Fortis Advisors LLC v. Johnson & Johnson and our July 2024 Advisory regarding Trifecta Multimedia Holdings Inc. v. WCG Clinical Services LLC, the Delaware courts have made it clear in cases involving earn-out disputes that buyers would be well advised to insist upon the inclusion of anti-reliance provisions in their favor in applicable acquisition agreements. Doing so should significantly hinder sellers’ ability to bring fraud claims following an earn-out failure based upon the invariably optimistic and aspirational discussions regarding post-closing performance and operational integration of the acquired business frequently occurring as part of pre-signing negotiations. The Delaware Court of Chancery’s letter decision in Shareholder Representative Services LLC v. Sphera Solutions, Inc.¹ offers yet another circumstance reinforcing this conclusion, and also provides insights as to the common law predicate for its “puffery” analysis that we have previously discussed in connection with the Trifecta, Camaisa, and Auris decisions.

The case also provides a useful reminder for transaction practitioners regarding the reimbursement of legal fees as part of indemnified losses.

Background

Sphera arose out of the acquisition by Sphera Solutions, Inc. (Sphera), an ESG and risk management company, of SupplyShift Inc. (SupplyShift), a supply chain sustainability management services company. The merger consideration included an earn-out based upon SupplyShift’s 2024 annual recurring revenue (Earn-Out Revenue) over an agreed threshold. The earn-out potentially represented close to half of the aggregate merger consideration. Shareholder Representative Services (SRD), acting in its capacity as representative of the former securityholders of SupplyShift, alleged in its complaint[[N: Verified Complaint, Shareholder Representative Services LLC v. Sphera Solutions, Inc., C.A. No. 2025-0174-DH (Del. Ch. filed Feb. 17, 2025) [hereinafter Compl.].]] that SupplyShift agreed to the earn-out structure in reliance on a series of pre-closing representations by Sphera senior management regarding the post-closing operation of the acquired business. Such alleged representations included the following: (1) Sphera would market SupplyShift products to all of its 7,000 customers, (2) Sphera’s prediction that all of its customers would have a need for SupplyShift’s products; (3) Sphera would substantially increase SupplyShift’s marketing budget and dedicate resources to cross-selling; (4) Sphera already had a “substantial integration plan” that it would implement immediately post-closing; and (5) a statement to the effect that successfully cross-selling SupplyShift’s lowest-priced offering to only 7.5% of Sphera’s customers would exceed the earn-out threshold, and that successfully cross-selling SupplyShift’s average-priced offering to only 3% of Sphera’s customers would have maximized the earn-out.²

Post-closing, Earn-Out Revenue allegedly fell well short of the earn-out threshold and the earn-out went unpaid. SupplyShift alleged that Sphera’s post-closing conduct caused the shortfall, and was notably incompatible with Sphera’s own pre-closing statements made in relation to post-closing integration, marketing, and cross-selling efforts.³ Of particular note, SupplyShift alleged that, before the merger agreement was executed, Sphera had already finalized its internal budget for the following year setting a 2024 annual recurring revenue goal more than $1 million below the $8.5 million threshold required for any earn-out payment, and otherwise demonstrated a marketing efforts commitment that was “pre-engineered” to guarantee that no earn-out would ever be paid. Sphera did not disclose this budget to SupplyShift during negotiation.⁴

SRS brought fraud (both “traditional” and promissory fraud) and breach of contract claims against Sphera on behalf of SupplyShift’s former securityholders. Sphera moved to dismiss the fraud count and breach of contract count relating to fee-shifting on a partial motion to dismiss. The motion to dismiss was denied by the court as to the fraud count and granted as to the fee-shifting breach of contract count.⁵

Fraud Claims

The elements of a “traditional” fraud claim in Delaware are the same as those described in our prior Advisories: (1) a false representation, (2) the maker’s knowledge of or belief in its falsity or reckless indifference to its truth, (3) an intention to induce action based on the representation, (4) justifiable reliance by the recipient on the representation, and (5) damages. 

With respect to the promissory fraud claim, the court noted that under Delaware law, statements that are “merely promissory in nature and expressions as to what will happen in the future are not actionable as fraud.”⁶ Accordingly, promissory fraud claims require that a plaintiff show facts supporting a reasonable inference that the promisor had no intention of performing at the time the promise was made.

While not expressly articulated as such in the cases discussed in our prior earn-out related Advisories, this additional requirement for promissory fraud appears to be part of the foundation for the Delaware courts’ treatment of statements considered “puffery,” i.e., the type of “classically vague statements that a commercial party routinely makes during deal-making courtship” that cannot support a fraud claim.⁷ It is implicit in the “puffery” determination that the maker of the optimistic statement in question actually believes in such statement, or at least believes in it enough such that they could not be seen as completely false. While other factors, such as the existence of a sophisticated commercial counterparty who would know better than to rely on such statements being literally true, apply as well, it seems difficult to expect that a court would consider a statement “puffery” where there was strong evidence that the maker actually believed the proposition in question was not remotely achievable.

“Puffery”

Consistent with the analysis in Trifecta and Camaisa, the court in Sphera began by identifying which of the alleged misrepresentations constituted non-actionable puffery. The court noted that “a forward-looking statement falls outside the mere puffery ‘safe harbor’ where it is both ‘sufficiently specific’ and ‘fraudulently conceived.’”⁸

The court found that the following of Sphera’s statements constituted puffery:

• Sphera’s promise to cross-sell SupplyShift’s products to “all 7,000”⁹ of its customers
• Sphera’s prediction that all of its customers would have a need for SupplyShift’s products

The court noted that the first of these statements was “textbook corporate optimism” and that the second fell “within the aegis of the ‘classically vague statements that a commercial party routinely makes during deal-making courtship.’”¹⁰

The court found that Sphera’s alleged promises to substantially increase SupplyShift’s marketing budget and devote resources to cross-selling during the earn-out period satisfied the threshold for surviving a motion to dismiss because SupplyShift also alleged that Sphera had finalized its internal budget for the SupplyShift business line prior to making such statements at levels such that they could not have been true and Sphera’s post-closing actions also called into question whether it believed such statements were true. 

Reliance

Similar to the acquisition agreements covered in our April 2026 and July 2024 Advisories, the merger agreement in Sphera included an integration clause but did not include non-reliance language from the seller, SupplyShift, for the benefit of the buyer, Sphera. Reviewing prior Delaware case law,¹¹ the court observed that including a non-reliance clause would have allowed it to resolve the fraud claims premised on extracontractual representations in buyer’s favor at a motion to dismiss stage, but that an integration clause would not. Noting the general principle that adjudication of reliance on a motion to dismiss (in the absence of an unmistakably worded non-reliance clause) is generally inappropriate, the court determined that SupplyShift had adequately pleaded the reliance prong.

Fraud by Omission

SRS advanced an alternative theory of fraud: fraud by omission. Specifically, that Sphera had an affirmative duty to disclose its pre-closing budget because it directly contradicted Sphera’s (alleged) representations about marketing resources and cross-selling. The court allowed this theory to proceed as well on the basis that while parties to an arm’s-length transaction have no affirmative duty to disclose material facts, where a party chooses to speak, it cannot speak “partially or obliquely such that what the party conveys become[s] misleading.” Because Sphera made commitments about cross-selling and marketing support while its contrary budget was already final, those statements could give rise to a duty to disclose the budget itself. 

Breach of Contract/Fee-Shifting

The court granted Sphera’s motion to dismiss SRS’ claim for attorneys’ fees under the Merger Agreement’s indemnification provision, which required Sphera to indemnify SupplyShift’s securityholders from losses “owed to an unaffiliated third Person” [and] … “arising out of … any breach of, default in, or [Sphera’s] failure to comply with any of the covenants or agreements” in the Merger Agreement. SRS argued this provision covered fees incurred in prosecuting the litigation, given that Sphera had covenanted to make the earn-out payment and had allegedly breached that covenant.

The court declined to read the provision as a fee-shifting clause for first-party litigation, emphasizing multiple times that there is a strong presumption in Delaware against fee shifting in indemnification provisions and that such fee shifting will only be recognized where there is a clear and unequivocal indication of the parties’ intent to cover first-party affirmative claims. As summarized by the court, under Delaware law, the following features are hallmarks of a fee-shifting intent: 

1. If there is indemnification for breaches that could not arise from a third-party claim
2. If the definition of indemnifiable “losses” differentiates between third-party claims and non-third party claims
3. If the notice requirements contemplate special or unique process requirements for third party claims
4. If the relevant agreement does not provide for fee-shifting in other contexts

These factors are to be analyzed together, without any feature having more weight than the other. 

The court analyzed the agreement in question and found that only the fee-shifting factor favored a finding of fee-shifting intent, while the language relating to the first two factors signaled the opposite. The court found that the existence of an indemnification loss notice provision allowing for notice of indemnification claims, even where there has been no third party claim, to be neutral and did not necessarily mean that first party claims were covered (while noting Delaware’s bias against fee-shifting). Noting in particular language in the agreement the existence of asymmetrical language which seemed to very clearly indicate the intent to limit indemnification to third party claims for claims by SupplyShift but not for claims by Sphera, the court dismissed the fee shifting count.

Key Takeaways

• In our view, anti-reliance clauses in the buyer’s favor should become the default position for buyers in acquisition agreements with earn-outs going forward. Case after case in Delaware indicates or strongly implies that a well-written anti-reliance clause in favor of the buyer would have eliminated the seller’s earn-out fraud claims premised on alleged extra contractual representations. 
• We would go further and suggest that the inclusion of a short form anti-reliance concept is worth including in commercial agreements outside of the M&A context where a party makes a relatively undefined “efforts” (or other similar generally defined performance) commitment while having contemporaneous discussions with the counterparty about what exactly those efforts (or that commitment) will mean in practice. We do not see a reason why the result should be any different in a commercial agreement than in an acquisition agreement. 
• The puffery determination remains a “know it when I see it” test that resists well-defined guidance for future application. The court found that Sphera’s promise to cross-sell to “all 7,000” customers was mere puffery, but never explained why that promise was not a serious, intended commitment. Nothing in the opinion suggests that marketing to all 7,000 customers was infeasible; if anything, Sphera’s own alleged representations about the percentage of its customer base needed to clear the earn-out threshold suggest that significant cross-selling was viewed as realistic. In our view, the court’s basis for distinguishing the “all customers” statement from the more specific, quantified promises is not developed in the opinion. The result may be correct, but the reasoning, as written, is closer to assertion than analysis. 
• Puffery and reliance are not the only battlegrounds in an earn-out fraud case; a fraud-by-omission theory gives the seller another potential line of attack. A buyer generally need not volunteer material information during an arm’s-length negotiation. But under Delaware law, a party that chooses to speak on a subject may not make a materially misleading partial disclosure. Applying that principle at the pleading stage, the Sphera court found that the alleged statements about marketing support and cross-selling, viewed together with the allegedly contrary budget that had already been finalized, were sufficient to support an omission-based fraud claim.
• Parties should draft indemnification provisions on the assumption that a Delaware court will read them against first-party fee shifting. The presumption did substantial work in Sphera, and appeared to shape how the court resolved ambiguous language within the hallmark’s framework. A party expecting the indemnification provision to extend to its own enforcement costs against the counterparty should insist on express (and even redundant) clarity at the expense of drafting elegance. 

© Arnold & Porter Kaye Scholer LLP 2026 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.